893.51/7727a: Telegram

The Secretary of State to the Ambassador in China (Gauss)

25. I. Please deliver the following message to Generalissimo Chiang Kai-shek from the President:

“I have had the ‘flu’ for the past few days and am only just able to attend to the vast amount of work.

“The Secretary of the Treasury17a has sent me a recommendation which I hereby quote to you just as it was written:18

‘1. The facts regarding inflation in China and the possibility of its control through the use of dollar resources are as follows:

‘Inflation in China, as you well know, arises from the grave inadequacy of production for war needs and essential civilian consumption. Supplies have been drastically reduced by enemy occupation and the cutting off of imports except the small amounts that come by air or are smuggled from occupied territory.

‘The Chinese Government cannot collect sufficient taxes or borrow from the people in adequate amounts. As a consequence, the Government has been issuing 3.5 billion yuan a month, twice the rate of a year ago.

‘The official exchange rate for yuan is now 5 cents; before China entered the war it was 30 cents. The open market rate for yuan in U. S. paper currency is 1 cent and in terms of gold one-third of a cent.

‘You have suggested the possibility of our selling dollar currency for yuan to be resold to China after the war at no profit to us. No [Page 828]doubt something could be done to alleviate inflation through the sale of gold or dollar currency in China. I have received the following message from Dr. Kung dated December 14:

‘ “You will be pleased to hear that the recent gold shipment is one of the outstanding factors contributing to the strengthening of fapi, because people believe that the arrival of gold has increased the much needed reserve of our currency, thereby influencing the stability of prices. The action of the United States Government re-affirms to the Chinese people that, despite difficulties arising from the blockade and the cumulative effects of over 6 years of war against the invasion, China has a powerful friend desirous of strengthening China’s economy as conditions permit.”

‘However, while something could be done to retard the rise in prices, the only real hope of controlling inflation is by getting more goods into China. This, you know better than I, depends on future military operations.

‘2. China has tried two similar monetary remedies for alleviating inflation without marked success:

  • ‘1. The Chinese Government issued and sold dollar securities for yuan, setting aside $200 million of the aid granted by this country for the redemption of the securities. (These securities were sold at exorbitant profit to the buyers. For instance, a person holding $100 in U. S. currency could have quadrupled his money in less than 2 years by selling the currency for yuan on the open market and buying the dollar securities issued by the Chinese Government.) I believe that the program made no significant contribution to the control of inflation.
  • ‘2. The Chinese Government has recently been selling gold at a price in yuan equivalent to $550 an ounce, about 15 times the official rate. We have shipped to China more than $10 million of gold and they have sold about $2 million of gold for yuan. This program has not been tried sufficiently to warrant any definite conclusion as to its possible effect.

‘China now has $460 million of unpledged funds in the United States and is getting about $20 million a month as a result of our expenditures. China could use these funds in selling gold or dollar assets for yuan, although in my opinion such schemes in the past have had little effect except to give additional profits to insiders, speculators and hoarders and dissipate foreign exchange resources that could be better used by China for reconstruction.

‘Under the circumstances, a loan to China for these purposes could not be justified by the results that have been obtained. It is my opinion that a loan is unnecessary at this time and would be undesirable from the point of view of China and the United States. Large expenditures on ineffective measures for controlling inflation in China would be an unwise use of her borrowing capacity which should be reserved for productive uses in other ways. On reconstruction, it is too soon for us to know the best use or the best form of the aid we might give to China.


‘For the past 5 years I have had a deep admiration for the valiant fight that the Chinese people, under the leadership of Chiang Kai-shek, have waged against Japanese aggression. Therefore, I am in [Page 829]complete sympathy with your position that no stone be left unturned to retard the rise in prices. Using the tools we have at hand, I recommend the following:

  • ‘1. All U. S. expenditures in China, currently $400 million yuan a month and rising rapidly, be met through the purchase of yuan with gold or dollar currency at whatever price we can get them for in the open market. This is equal to more than 10 per cent of the present rate of issue.
  • ‘2. Accelerate the shipment of gold purchased by China to twice the amount we have previously planned to send. It should be possible to raise gold shipments from $6 million a month to about $12 million. At the present price for gold in the open market this would be equal to the present 3.5 billion of yuan currency that is being issued.

‘The impact of this two-fold program should contribute to retarding inflation, always bearing in mind that the basic reason for inflation in China is the shortage of goods.’

“I think, however, that in addition to this program we should have a very high-class Commission visit Chungking and confer with both you and Dr. Kung and try to work out a complete meeting of the minds on this difficult matter.

“This happens to be the first telegram I have sent in 1944 and it carries to you and to Madame Chiang very warm regards from my wife and myself. Roosevelt”

II. It is to be expected that this message will be disappointing to the Chinese. The Department feels that it would be well for you in your discretion to deliver it in person and to accompany the delivery with an oral statement to the effect that although on its face this message may sound unresponsive to the Chinese request, it constitutes in fact an evidence of the President’s confidence in President Chiang and his feeling that there exists between Chiang and himself so firm a relationship of mutual and reciprocal friendly understanding that he is willing to lay before Chiang the exact text of the opinion expressed to him by his principal financial adviser, the Secretary of the Treasury. This is a clear indication of a desire to discuss the question involved on its merits and without reservations or concealment. The many factors involved in the problem of China’s finances and of affording of financial assistance by the United States to China make the whole question very complicated. The President’s expression of his desire to send to China a commission of high quality for the purpose of considering and discussing with the Chinese all angles of this and related problems is clearly indicative of a desire to handle the whole matter in a manner which will be to the real advantage both of China and of the United States.

  1. For Mr. Morgenthau’s comments on Mr. Hull’s attitude on this subject, see Morgenthau Diary, pp. 997–998, 1006, and 1014–1015.
  2. See memorandum by the Secretary of the Treasury to President Roosevelt, December 18, 1943, Foreign Relations, 1943, China, p. 480.